What does reform mean for mortgages?
More supervision of lenders may be a good thing, but if it's too restrictive it could lead to fewer products.
Sunday 20 June 2010
The world financial crisis started with the mortgage market; so it's logical, when the Chancellor, George Osborne, announced his plans for reform of financial regulation, that greater supervision of home loans would be a central plank.
The idea is that with greater supervision of lender balance sheets by the new beefed-up Bank of England, under the governor, Mervyn King, never again will lenders be allowed to stretch their finances to breaking point in order to be able to lend more and more money.
In reality, if everything goes according to plan, top-of-the-market products such as Northern Rock's infamous 125 per cent Together mortgage and Bradford & Bingley's disastrous foray into buy-to-let should never be repeated. At least, that's the theory.
"Handing the powers to oversee lender balance sheets to the Bank of England makes sense because, under the old system, the Financial Services Authority faced a conflict of interest: it wanted to see responsible lending, but also wider consumer choice," Ray Boulger, technical manager at John Charcol, one of the UK's biggest brokers, says. "The FSA thought it could simply stand back and create consumer information, such as key facts documents, and trust borrowers to make the right decisions in terms of how much cash it is sensible to borrow. As we know, it didn't work," he adds.
However, the new system of the Bank overseeing lender balance sheets, while the new Consumer Protection Agency is charged with making sure the public are given a fair deal, could, according to some experts, tilt the balance towards ever more restrictive lending. "What mustn't happen is that we see arbitrary limits imposed such as a cap on the loan to value [LTV] lenders are allowed to offer or such tight criteria, dictated from upon high by the regulator, that means that the self-employed or those with variable incomes can't get a mortgage," James Cotton, mortgage specialist at mortgage broker London & Country, says.
These are concerns echoed by Mr Boulger: "We don't want innovation to be killed off by over-caution, particularly over LTVs. At present, the differential in cost and availability of mortgage products, if you have 10 or 30 per cent, is massive and that has to be addressed. We need more competitive higher LTV products, not fewer," he says.
Mr Boulger cites the example of Nationwide's negative equity mortgage as an example of a mortgage product that may not match the template for responsible lending, but is potentially a help. The Nationwide mortgage will lend up to 125 per cent of the property value but only for an existing customer in negative equity who wants to move house: "Sometimes borrowers, through no fault of their own, are placed in a poor situation and they need innovation to get out of it. It'd be unfortunate if plans for regulation of the mortgage market prevented lenders from being able to meet the genuine need of borrowers," says Steve Blore of Nationwide.
But a strict cap on LTVs is unlikely: "Labour rejected it and I can't honestly see a Conservative-led government going with such a restrictive idea. It is against free markets," Mr Boulger says. As for a potential cap on mortgage income multiples, Mr Cotton is sceptical this will happen: "Take the example of a trainee barrister or junior doctor. They may not be earning much today, but are very likely to be bringing in a big wage tomorrow. Should they have to wait to get on the property ladder?" Mr Cotton asks.
In last year's review of the mortgage market, the FSA banned self -certification loans and called for the imposition of affordability criteria. Mr Boulger suggests that, overall, the presence of a slightly more interventionist regulator, more focused on keeping lenders on the straight and narrow, may increase rather than reduce competition and the mortgages available: "If the money markets feel there is a fully functioning regulatory regime in place, then that may ease concerns about lending. This in turn could lead to an increase in the number of products available," Mr Boulger says.
"It's all about balance: how to ensure there is no repeat of the crisis while not choking the market and stopping consumers getting mortgages they can actually afford," Mr Cotton concludes.
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
Scottish Power hit with sales ban by regulator
There are 'dark corners' of the investment and pensions industry, says Pensions Minister
Simon Read: You're guilty until proven innocent when HMRC sends in the tax credit detectives
Midweek Money: The end (of the tax year) is nigh: act now
Weekly Money: round-up of the personal finance stories you may have missed 2 to 6 March
- 1 Tourist films plane's descent just metres above packed Caribbean beach
- 2 Kate Moss: Previously unpublished nude photo revealed by Mert and Marcus
- 3 Indian woman creates 'Marriage CV' after parents put her on dating site: 'Definitely not marriage material. Won’t grow long hair, ever'
- 4 World Book Day: Boy 'excluded' from school after dressing up as Fifty Shades' Christian Grey
- 5 Bad Jews poster 'censored' on London Tube
Nearly 100,000 of Britain's poorest children go hungry after parents' benefits are cut
Durham Free School: 'Creationism taught at' free school facing closure
End of the licence fee: BBC to back radical overhaul of how it is funded
Elif Shafak: Turkish author warns against rise of British nationalism
Most people think legal tax avoidance is just as wrong as illegal tax evasion, poll suggests
Nigel Farage promises Ukip will not 'stigmatise' would-be migrants – and says he wants 'everyone to speak the same language'
iJobs Money & Business
£13000 per annum: Recruitment Genius: This is an exciting opportunity to join ...
£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...
£12 - £15 Hourly Rate: Jemma Gent: In this role you will report to the Head of...
£8 per hour: Recruitment Genius: This Pension Specialist was established early...
Day In a Page
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads